With various media reports announcing that the federal government looks likely to raise the GST from its current level of 10%, the naysayers have exploded out of the woodwork.
But we all seem to have forgotten one thing, which I'll get to in a second.
Increase the GST?
The welfare lobby says increasing the GST should be the last resort, and have released a report showing that an increase would hurt low and middle-income households the most – even with an income tax cut factors in.
We still have no idea if the GST will be raised, what it might be raised to, if it will be extended to other products and services, and we have no idea whether the government will offset the GST with tax cuts, or what shape or form they might take.
But the Australian Council of Social Service (ACOSS) has still managed to roll out research showing that a GST level of 15% would consume a higher percentage of income of low and middle-income households than it would for the top 20% income earners.
There's one issue I have with that – 3% of $200,000 ($6,000) is more than 7% of $50,000 ($3,500), so in reality the high-income earners would be paying more, despite it being a lower percentage of income. Isn't that how it should work?
Would ACOSS have released the research if it had shown that low and middle-income earners would be better off?
Instead ACOSS suggests that the government remove inefficient taxes such as stamp duty, look at super tax concessions, negative gearing and capital gains and other tax concessions and loopholes. (All of which would probably have a similar effect on most Australians as raising the GST, in my view).
The problem that always arises when major tax changes are proposed is that vested interest groups will always clamour and stand up for their members/sector of society.
'He who speaks the loudest and earliest gets the most attention' is perhaps the rule of the game. I use the welfare lobby example above, but they aren't the only interest group clamouring for attention. It also goes to show that statistics can be used as proof in both sides of an argument.
Government's primary role
That brings me to the one thing that we all seem to forget.
The government is not there to rip us off. One of its primary jobs is to allocate spending based on the amount of revenues it brings in through taxes, duties and excise, and then to allocate that capital for spending on welfare, social security, defence, health and education, and other needs such as infrastructure.
The federal government can only spend as much as it earns unless it borrows funds and runs a deficit such as it has for the past 6 years and looks likely to continue doing for at least the next few years. That's the equivalent of running up expenses on your credit card, and eventually we as a country need to pay that back – or face the consequences such as Greece now finds itself in.
Clearly, the best financial strategy would be to run a budget surplus, putting the surplus aside for those years when the government needs to spend more than it brings in – much as you or I would keep some savings handy just in case.
The problem with that is then we have other vested interest groups clamouring loudly that the government is taxing us too much and should spend some of the surplus – for which they will, of course, have some ideas.
An ageing population
The reason the government is considering raising the GST is to fix a major problem the government currently faces – and it's a double blow to revenues and spending.
As our population ages, we face the issue of more people in retirement, who require more government support, while paying virtually no or little tax. That also means we have a smaller population of working-age people paying tax, required to support an ever-growing population of retired, older Australians. According to government data, the proportion of Australians aged over 65 jumped from 8% in 1970-71 to 13% in 2001-02. Over the next 40 years, that is expected to double to 25%.
That means lower taxes and higher demand on government spending if we persist with our current tax system.
The additional issue is that we as a country don't want to be adjusting taxes every year or so to fix problems that crop up, so we need a tax system that provides a more sustainable base.
Foolish takeaway
The sooner Australia takes action, the less pain we need to feel – but it does mean that most sectors of Australia might need to be prepared to pay slightly more tax now and get used to fewer concessions.
